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What Is a Mortgage Buydown?

Estimated reading time: 6 minutes

As mortgage rates have gone up, so has the popularity of temporary mortgage buydowns. Temporary buydowns allow homebuyers to lower a mortgage rate—often for 1–3 years—in exchange for an upfront cost.

In the process, they can save homebuyers thousands of dollars. Many sellers and builders, and some lenders (including Mr. Cooper), have been paying some or all the cost to help homes sell faster while rates are higher. Here are the basics on how they work.

Homebuyers: We’ll Knock 1% Off
Your Rate for a Full Year.
Buy now and we’ll drop your rate by 1% for the first year of your mortgage* Plus, we’ll give you up to $1,500 in credit when you refinance later.**

How does a temporary mortgage buydown work?

Temporary mortgage buydowns can be structured in a variety of ways, but they’re usually structured as 1-0, 2-1, or 3-2-1 buydowns. In each case, the first number tells you how many percentage points an interest rate will be lowered in the first year of a mortgage. The second number tells you how much the rate will be reduced the second year, and so on. Putting everything together:

  • A 1-0 buydown would drop your rate by 1% the first year of a mortgage, and 0% the second year. (In other words, the rate would be lowered for 1 year.) Mr. Cooper’s 1% Mortgage Markdown discounts your monthly payment by reducing your interest rate by a full percentage point for one year.1 Learn more.
  • A 2-1 buydown would drop your rate by 2% the first year of a mortgage, and 1% the second year.
  • A 3-2-1 buydown would drop your rate by 3% the first year of a mortgage, 2% the second year, and 1% the third year.

Note: Temporary mortgage buydowns shouldn’t be confused with discount points, which lower a mortgage rate permanently (e.g., .25%), and are usually purchased by homebuyers.

How much can I save with a temporary buydown?

Our mortgage buydown calculator can help your crunch the numbers, but let’s look at a quick scenario:

The Garcias are purchasing a $400,000 home. They qualify for a 30-year fixed rate mortgage with a 7.5% interest rate. They’re also putting 10% down ($40,000). This will make their final loan amount $360,000, and their normal monthly payment* (principal and interest) will be $2,517.

With a 1-0 buydown, they’ll save an estimated $2,900.**

1-0 BuydownNormal PaymentYear 1 Rate
Interest Rate7.5%6.5%
Monthly Payment
(Principal & Interest)
$2,517$2,275
Savings/
month
$242
Savings/
year
$2,901

With a 2-1 buydown, they’ll save an estimated $8,578.

2-1 BuydownNormal PaymentYear 1 RateYear 2 Rate
Interest Rate7.5%5.5%6.5%
Monthly Payment
(Principal & Interest)
$2,517$2,044$2,275
Savings/
month
$473$242
Savings/
year
$5,678$2,901

With a 3-2-1 buydown, they’ll save an estimated $16,895.

3-2-1 BuydownNormal PaymentYear 1Year 2Year 3
Interest Rate7.5%4.5%5.5%6.5%
Monthly Payment
(Principal & Interest)
$2,517$1,824$2,044$2,275
Savings/
month
$693$473$242
Savings/
year
$8,317$5,678$2,901

*Monthly payment estimates do not include monthly property taxes, homeowners insurance, or private mortgage insurance (PMI) costs.

**Grand total estimates may vary slightly compared to the numbers seen in the buydown scenarios’ charts.

How much does it cost to buy down an interest rate?

A temporary buydown’s final cost will depend on how much the buydown will save you. Let’s take a look at the Garcia’s 1-0 buydown example above that will save them $2,900.

Seller-funded buydown

If their seller (or homebuilder) funds the buydown, $2,900 is how much the Garcia’s mortgage company will need to collect from the seller at closing. From there, the Garcia’s mortgage company will put the funds in an escrow account and apply a portion of the funds to the Garcia’s mortgage payment each month.

That said, some sellers fund a buydown by adding the cost to their home’s sales price. So, if a home is being sold for $300,000 and a buydown will cost $5,000, the final sales price would be $305,000. The extra $5,000 would transfer to the lender at closing rather than coming out of the seller’s pocket. Note that the home will also need to appraise for that higher cost.

Lender-funded buydown

If a lender funds the buydown, the lender will provide the $2,900 for the escrow account, and the Garcias will pay any additional fees that are required.

When is a mortgage buydown a good idea?

Everyone’s situation is different, but a temporary mortgage buydown may be a good idea if you’re worried that interest rates will go down in the future.  A seller- or lender-funded buydown can give you a way to buy a house now for less while waiting to see if rates change.

If rates do go down eventually, you can consider refinancing your mortgage to a better rate then. Expert advice varies, but outlets like Investopedia have suggested that refinancing can make financial sense when rates are 1 or 2% lower than your current rate.

To that point, Mr. Cooper’s RateSwap lets you buy now and get up to $1,500 in savings when you refinance.2 Learn more about RateSwap.

Ready to get started on a mortgage buydown? Call our Mortgage Professionals at 833-685-2565 to discuss your options, or get started online.

1. Mr. Cooper’s Mortgage Markdown is a temporary buydown program that reduces the borrower’s effective interest rate and effective monthly payment for a one year period of time by establishing a custodial escrow account, which will be funded partially by the lender and partially by the borrower (in the case of a VA loan the account will be funded entirely by the lender), and funds will be dispersed from the escrow account to cover the difference in interest during the one year buydown period which subsidizes the monthly payment amount. Mortgage Markdown is available for purchase loans that are locked by 03/31/2024. Mortgage Markdown is only available on purchase loans for primary residences. Not available on jumbo loans, second mortgages, or refinance transactions. Offer may not be redeemed for cash or credit and is nontransferable. Offer cannot be retroactively applied to any loans. This offer is subject to changes or cancellation at any time at the sole discretion of Mr. Cooper. Additional restrictions/conditions may apply. Offer is contingent on qualification per full underwriting guidelines.

2. To be eligible for RateSwap, you must lock a new purchase loan with Mr. Cooper by 03/31/2024. Mr. Cooper will waive the origination (application fee in New Jersey) up to $1500 on a refinance within 39 months of the purchase loan’s lock date. All other fees apply. Refinance subject to borrower and property qualifications and credit approval. Not all applicants will qualify. Refinanced loan must meet agency and investor guidelines. Limited to the initial refinance of the qualifying loan. You will be required to have made a certain number of timely monthly payments before you can refinance. Applicable on new purchase applications only. Not available for purchase loans currently in process or refinances. Other conditions and restrictions apply. Offer subject to change at any time.